Tomer Ravid

2020

Innovation is Change: An Argument for the Instability of Long-Run Market Equilibrium and Persistence of Profits (pdf)

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Abstract

I propose that the long-run, profitless market equilibrium predicted by models of perfect competition is unstable to innovation: Under innovation, there are always infinitely many goods that can be invented, and inventing them is profitable precisely because it allows the inventor to avoid competition. Since the invention of such goods is always possible and rewarded, I argue that long-run market equilibrium is impossible, and that profits persist. I demonstrate that this is the case in a simple stochastic model for the dynamics of production and profit. I then proceed to argue that the main result extends to more general models.